Fannie Mae Agrees to Demands of Regulator

Fannie Mae, the nation's largest mortgage buyer, has signed an agreement with its regulator to fix accounting problems, raise billions of dollars in capital, and scrutinize management policies and internal controls, the Washington Post reported.

The agreement came Monday, on the heels of a highly critical report by the Office of Federal Housing Enterprise Oversight (OFHEO), which outlined steps to repair widespread accounting irregularities that allowed the company to manipulate numbers to make earnings look less volatile from quarter to quarter.

The government-chartered company agreed to add more than $5 billion in new funds to its capital reserve within the next nine months as a cushion against losses, the New York Times reported.

OFHEO's report also pointed to Chief Financial Officer J. Timothy Howard, who apparently not only set the company's financial goals but measured them as well. He oversaw the performance of the internal auditor. Fannie Mae also agreed to name an independent chief risk officer and ensure the independence of the internal auditor.

Specifically, Fannie Mae agreed to change the way it accounts for derivatives and to stop using what's been termed “a financial cookie jar” that the company used to smooth over fluctuations in earnings.

The company's management pledged “full support” for the agreement, according to Business Week, which reported that Fannie Mae's stock rose 99 cents Monday, the day the agreement was reached. By contrast, when the OFHEO report was issued last week, stock prices dropped by 15 percent.

"I think the agreement is a positive, indicating that the company is cooperating with the regulators, but it's preliminary in nature," Josh Rosner, an analyst with New York-based Medley Global Advisors, told the New York Times. "I would suspect that this is the end of the beginning rather than the beginning of the end."

The company faces an ongoing review by OFHEO into additional accounting issues, a probe by the Securities and Exchange Commission, an Oct. 6 congressional hearing and an investigation by a committee of outside board members.